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Coke exceeds profit estimates through cost cutting, higher prices

By Jennifer KaplanBloomberg

Wed., July 26, 2017

NEW YORK—Coca-Cola Co.’s bid to slim down operations is showing signs of paying off.

The soda giant posted second-quarter profit on Wednesday that beat analysts’ estimates by a penny a share. A combination of cost cutting and higher drink prices helped the company weather sales declines, brought on in part by efforts to spin off its bottling operations around the world.

Despite an effort to de-emphasize its namesake product, carbonated soft drinks still make up the majority of Coca Cola's sales. In an effort to appeal to health-conscious consumers, the company is selling smaller cans and bottles, which contain fewer calories. (Justin Sullivan / Getty Images)

The results bring a lift to James Quincey in his first quarter as chief executive officer. The 52-year-old, who took the reins from Muhtar Kent on May 1, has vowed to cut costs by an additional $800 million (U.S.) — furthering a productivity push started by his predecessor. He’s also building on Kent’s legacy by completing efforts to offload the bottlers and focusing on revenue growth rather than beverage volume.

“Our performance gives us confidence that we will achieve our full-year financial objectives even in the face of challenging conditions,” Quincey said in a statement.

The shares were little changed at $45.21 in New York after the results were released. The stock had climbed 9.1 per cent per cent this year through Tuesday’s close.

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Excluding some items, earnings amounted to 59 cents a share last quarter. That exceeded the 58 cents predicted by analysts.

While revenue declined 16 per cent to $9.7 billion, that was a bit better than what Wall Street was expecting. Analysts estimated $9.65 billion on average.

One of Quincey’s biggest challenges is transforming Coca-Cola from a soda business into a “total beverage company.” That means relying more heavily on water, tea and other drinks to fuel growth — and de-emphasizing its namesake cola.

Quincey’s strategy is already affecting the company’s C-suite and management structure. Coca-Cola now has a chief growth officer and a chief innovation officer who report directly to the CEO. The company is no longer reporting results in terms of sparkling and still beverages. Instead, the portfolio is split into “category clusters.” Those include sparkling soft drinks; juice, dairy and plant-based beverages; water, enhanced water and sports drinks; and tea and coffee. Quincey has also stressed the importance of taking some risks in order to drive innovation.

“One of the dangers of being 130 years successful is you think you’ve got the answers,” he said on a call with analysts. “There needs to be some courage to try new things.”

But carbonated soft drinks still make up the majority of Coca-Cola’s sales. In that category, the company is facing a backlash from increasingly health-conscious consumers, especially in the U.S. To adjust, Coca-Cola has introduced smaller cans and bottles — formats that have fewer calories while also generating higher margins.

Coca-Cola isn’t alone in coping with changing consumer tastes. PepsiCo Inc. and Dr Pepper Snapple Group are scrambling to decrease their reliance on traditional soft drinks too. Per capita consumption of soda sank to a 31-year low in the U.S. in 2016, according to Beverage-Digest, a trade publication.

Soda producers also are grappling with greater regulatory burdens on their core products. Philadelphia was the first major U.S. city to implement a soft-drink tax in June. Similar measures have since passed in the San Francisco Bay area and in Boulder, Colorado, and Illinois’s Cook County. A similar initiative failed in Santa Fe, N.M.

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